US treasury secretary Timothy Geithner today intensified his row with the Chinese authorities after he called on G20 countries to agree a cap on their trade surpluses.

In a thinly veiled attack on Beijing, Geithner told the G20 nations to stop manipulating their currencies to prevent "excessive volatility" and a global currency war.

Only with an agreed framework for trade surpluses and currency values could the world economy recover in a sustainable fashion, he said.

The warning came before a meeting of G20 finance ministers in South Korea and followed a report by the World Bank that argued a full-scale currency war risked a return to the protectionism of the 1930s.

Geithner's attack was spurred by the latest in a long line of reports showing large parts of the US economy struggling to escape recession. A major national property index showed housing values declined in the last quarter across the US, with the worst falls in California and other western states.

Unemployment has maintained its historic high of 9.6%, while US consumer confidence has retreated, leaving president Barack Obama struggling to fight off Republican claims ahead of the midterm elections next month that he has failed to boost the economy.

Many members of Congress argue that China's currency is undervalued by as much as 40%, giving it an unfair advantage in international trade and stealing US jobs. The US trade deficit with China is projected to approach $250bn (£160bn) this year. Germany has also enjoyed an artificially depressed currency, after sovereign debt scares in Ireland, Greece, Portugal and Spain dragged down the value of the euro.

Geithner has argued on many occasions that China should allow its currency to rise in line with the success of its export driven economy. The Chinese authorities have rebuffed him, judging that only minimal rises in the value of the yuan are possible without derailing its own economy.

Chinese premier Wen Jiabao went further early this month, saying US policymakers misunderstood his country and could increase unrest.

Geithner wants the International Monetary Fund to police a new regime of caps that would "reduce the risk of excessive volatility in capital flows".

Jim Flaherty, Canada's finance minister, backed Geithner's proposals. "Secretary Geithner's letter is helpful. It sets out a possible way forward that has been discussed among participants here and previously," Flaherty said. "No one wants to be confrontational here. No one wants to walk away from here without an agreement on an action plan."

Mervyn King, the Bank of England governor, argued this week in a speech to business people in Wolverhampton that a deal to rebalance trade surpluses and currency values was necessary for a sustained global recovery. He said he regretted that talk among G20 leaders in 2009 to refashion the world financial system had "ebbed away".

King said unless the need to act in the collective interest was recognised "it will be only a matter of time before one or more countries resort to trade protectionism as the only domestic instrument to support a necessary rebalancing" of economies.

"That could, as it did in the 1930s, lead to a disastrous collapse in activity. Every country would suffer ruinous consequences – including our own."

In his letter, Geithner said: "First, G20 countries should commit to undertake policies consistent with reducing external imbalances below a specified share of GDP over the next few years, recognising that some exceptions may be required for countries that are structurally large exporters of raw materials.

A G20 source said China was against any limits on imbalances, while German economy minister Rainer Brüderle warned of a throwback to "planned economy thinking", and Russian deputy finance minister Dmitry Pankin said a draft communique to be issued on Saturday would steer clear of numerical targets. Pankin said he supported "exchange rates reflecting market conditions", but "excessive state interference in currencies should be avoided".

Japanese finance minister Yoshihiko Noda also voiced scepticism. "We doubt whether rigid numerical targets should be set. But when checking the progress in rectifying imbalances, that might be an idea," he said.